My memory must be failing. I could have sworn wiggin said (in some other thread) that our problems can't be addressed with Fed monetary policies.
My reading comprehension must be failing. It looks to me like wiggin is saying that what the Fed is doing is perfectly reasonable to address our problems.
REVIEW & OUTLOOK | NOVEMBER 13, 2010
Embarrassment in Seoul
The world won't follow slow-growth, weak-dollar America.
Has there ever been a major economic summit where a U.S. President and his Treasury Secretary were as thoroughly rebuffed as they were at this week's G-20 meeting in Seoul? We can't think of one. President Obama failed to achieve any of his main goals while getting pounded by other world leaders for failing U.S. policies and lagging growth.
The root of this embarrassment is political and intellectual: Rather than leading the world from a position of strength, Mr. Obama and Treasury Secretary Timothy Geithner came to Seoul blaming the rest of the world for U.S. economic weakness. America's problem, in their view, is the export and exchange rate policies of the Germans, Chinese or Brazilians. And the U.S. solution is to have the Fed print enough money to devalue the dollar so America can grow by stealing demand from the rest of the world.
But why should anyone heed this U.S. refrain? The Germans are growing rapidly after having rejected Mr. Geithner's advice in 2009 to join the U.S. stimulus spending blowout. China is also growing smartly having rejected counsel from three U.S. Administrations to abandon its currency discipline. The U.K. and even France are pursuing more fiscal restraint. Only the Obama Administration is determined to keep both the fiscal and monetary spigots wide open, while blaming everyone else for the poor domestic results.
The American failure was most acute on trade, as the U.S. and South Korea couldn't agree on a bilateral pact that the two countries had signed three years ago. Mr. Obama had campaigned against that pact in 2008, let it languish for two years in office, and now suddenly wants the South Koreans to agree to new terms.
But the Koreans aren't pushovers, and they want new concessions from America in return. They also see a less urgent need for a trade pact with the U.S. because, while Mr. Obama has fiddled, the Koreans have been negotiating other trade deals with all and sundry—not least a pact with the European Union that carries nearly identical terms to what the Bush Administration negotiated in 2007. Mr. Obama's negotiators left Seoul empty-handed.
Meanwhile, China and other Asian economies see first-hand that rather than spurring more U.S. growth (on which Asian exporters still depend), U.S. monetary ease has flooded the developing world economies with dollars they're not able to absorb; produced exchange-rate turmoil to the detriment of the region's traders; and sent the world's dollar-denominated commodity prices climbing.
Far from distancing himself from this Federal Reserve policy, Mr. Obama defended it more than once. "From everything I can see, this decision was not one designed to have an impact on the currency, on the dollar," Mr. Obama said in Seoul. "It was designed to grow the economy."
But this defense will only confirm to most of the world that the goal of U.S. monetary easing is solely domestic and political. Isn't the U.S. central bank supposed to be independent? Mr. Obama may come to regret his political embrace of Fed Chairman Ben Bernanke if commodity price increases flow through to consumer prices and leave Americans feeling poorer than they already feel.
The Administration's dubious monetary theories also led it to waste valuable political energy pushing an unlikely deal with China to revalue the yuan (and devalue the dollar). Instead Mr. Obama could have argued for reforms to China's capital account that would do some genuine good. China's exchange rate by itself has not contributed to global imbalances, but China's capital-account regulations have.
In particular, the fact that Beijing sterilizes capital inflows and recycles them into U.S. government debt instead of allowing capital to enter and exit more freely contributes to a global misallocation of resources. Mr. Geithner is too busy focusing on the exchange rate to notice, let alone to respond to Beijing's complaints about U.S. monetary instability by challenging China to liberalize its own capital account.
The world also rejected Mr. Geithner's high-profile call for a 4% limit on a nation's trade surplus or deficit, which would amount to new political controls on trade and capital flows. This contradicts at least three decades of U.S. policy advice against national barriers to the flow of money and goods. We don't like to see U.S. Treasury Secretaries so completely shot down by the rest of the world, except when they are so clearly misguided.
***
None of this should be cause for celebration, because a world without American leadership is a more dangerous place. The U.S. is still the world's largest economy, the issuer of its reserve currency, and its lone military superpower. No other nation has the will or capacity to lead the way the U.S. has for 70 years, so faltering American influence will produce a vacuum in which every nation can seek narrow advantage.
If Mr. Obama wants to restore his economic leadership, both at home and abroad, he needs an urgent shift in priorities. Strike a deal with Republicans to extend the current tax rates across the board, pursue the spending cuts proposed by his own deficit commission, end the regulatory binge that has constrained America's animal spirits, stop trying to direct capital toward political mirages like "green jobs," and press Congress to pass the Korean and other trade pacts.
The world will follow American leadership again only when it sees policies that restore robust U.S. economic growth.
http://online.wsj.com/article/SB1000...024501384.html
I guess we can assume that article reflects your exact opinion on the subject since you didn't offer one. I'd like to know how people with this opinion believe any economy can grow without jobs.
Rebuttal: Throwing Free Trade Overboard
The following excerpts pretty much outline my opinion on the subject (and I generally despise Tea Partiers),
...frustrated with Washington, and that includes its failure to make free trade work for America. Our trade deficit in manufactured goods was about $4.3 trillion during the last decade, and the country lost some 5.6 million manufacturing jobs.
...the rest of the world is stacking the free-trade deck against us.
...most policymakers agree that the Chinese currency is grossly and deliberately undervalued, that China fails to respect intellectual property rights and that it uses government subsidies to protect its own manufacturing base. Meanwhile, the movement says, the United States does virtually nothing in response.
...what good does it do to reduce the role of our government if foreign governments are free to rig the
rules, attack American industries and take American jobs?
...the value of foreign investments in the United States now exceeds the value of American investments abroad by $2.74 trillion,
...if our trade policy is so successful, (why do) so many experts believe that the 21st century will belong to China, not the United States.
...heroes like Alexander Hamilton, Theodore Roosevelt and Ronald Reagan had no problem restricting imports to promote our national interest.
...push Washington to stand up to China and re-establish American pre-eminence, even at the cost of the country’s free-trade record.
...a fundamental reorientation of our country’s attitude toward trade and globalization.
Last edited by Being; 11-13-2010 at 05:30 PM.
Faith is Hope (see Loki's sig for details)
If hindsight is 20-20, why is it so often ignored?
I can't tell if you dislike trade, or just how we haven't done a good job promoting it. But I think part of our poor job promoting free trade and being able to take on anti-competitive policies abroad is that we have built-up so many barriers to entry over here.
He's a unionist. What do you think?
Hope is the denial of reality
I have nothing against fair trade.Originally Posted by Dreadnaught
Really? Who is paying union dues? Not me, that's for sure.
Faith is Hope (see Loki's sig for details)
If hindsight is 20-20, why is it so often ignored?
What's your definition of "fair trade"?
If one partner gives up barriers the other gives up subsidies.
Faith is Hope (see Loki's sig for details)
If hindsight is 20-20, why is it so often ignored?
I agree with Being on this, in a way. (Didn't I have this discussion in a dream I had a few years ago? It didn't end well for anyone, though...)
Tariffs are only a temporary solution.
As I was saying in my earlier rant, the late 90s and early 2000s outlook that we can trade non-tangible goods for cheap manufactured products is starting to fade. We need to put more thingy industry in America. What kind of thingy industry? The really good, high tech kind...
I often enjoy reading/watching about various advances in prosthetics, robotics, nanotech, miniaturization, biofuels and all kind of recycling schemes (has anyone seen the new show Dean of Invention? It's wonderful), and I often wonder why this tech is so slow to permeate through the country. Imo, it is all the government's fault. Perhaps this osmosis is so slow because of not too much or too little regulation, but bads regulation... decaying urban cities (see my street sweeper post) are a light example of this.
=======================
One of the oddest things in this bads regulation that has recently really evoked wonderment is our prescription system. In Spain, France, Germany, etc. (Europe), and even Thailand (was just watching Bangkok Dangerous, which showed this), drugs (like antibiotics) are freely sold at an affordable price by trained licensed pharmacists that would in most cases require a prescription in the US, or even isn't available in the US yet.
So let's take antibitotics as an example. In the US, you'd need a prescription... go to the doctor, and wait 1-3 hours (ok, usually 30 minutes to an hour) in either/or the waiting/exam room. There is a high risk of infection while waiting for the doctor in the waiting room. The exam room that has an unfiltered air conditioning system. Then the nurse comes in and does the routine and unnecessary quick checkup (you only want an antibiotic prescription, damnit!)... after a while the tired doctor comes in. After listening to your problems and request for an antibiotic, he writes a prescription and sends the order to a pharmacy you ask for. You pay $20 as a copay, and your plan or the state pays as well. You go to the pharmacy. Oh, they don't have it. Come back tomorrow at 10AM. Ok, it's 10AM and they still don't have it. You wait another hour and finally get your antibiotics.
VERSUS:
You go to a corner pharmacy in Europe, buy the antibiotics after a quick discussion with the doctor, and off you go.
It just makes me really sad.
Last edited by agamemnus; 11-14-2010 at 07:52 AM.
The QEII explained.
The Ben Bernank. The Goldman Sachs.
One of the Fed's mandates is "maximum employment through monetary policy". But it's viewed it from a monetizing angle, flow of money and credit / price of money and credit. That leaves huge gaping holes in our reality, when more money or more profit doesn't "trickle down" to mean more jobs. Where's the policy for that?
Regarding "structural unemployment" and "mismatched skill sets", efficiency is hollowing out the American middle. Not a damn thing the Fed can do about that. I've asked this question a million times, but never get a straight answer: How is a service-based economy supposed to grow, when even skilled services are being outsourced overseas or replaced with efficient robotics or computers? Where's the policy for that?
In Rome, a few hours' drive to the east across New York's midsection, the loss of middle-skill jobs is felt in an unusual indirect way. Accountants used to come in from nearby Syracuse to pore over the books of a copper mill owned by Revere Copper Products Inc., a company founded by the famed crier who warned of the coming British.
"They used to have 150 people in their accounting office in Syracuse. Today they come into Revere and they scan the materials, and our accounts and ledgers and computer files, and they'll just transmit that to India. And they'll have a lot of the analysis of our books done in India," said Brian O'Shaughnessy, Revere's chairman.
He declined to name the firm, but noted that the independent accounting firm has substantially thinned its ranks, as have its competitors who bid to win his business.
"Instead of 150 people in Syracuse, they now have about 25 or 30, so all of a sudden you've seen a lot of accounting jobs go offshore," he said.
That might seem surprising, since the conventional wisdom is that the U.S. has become a service-driven economy.
In a 2007 study, Princeton University economist Alan Blinder estimated that 1 in 4 U.S. jobs potentially could be sent offshore because of technology, low-cost labor and the fact that service sector jobs are so much more abundant in the U.S. economy.
"I'm not totally convinced that the deep recession has accelerated the trend toward offshoring. There are certainly examples of that. But the main effect seems to be that firms learned to get by with less labor, whether domestic or foreign," said Blinder, a former vice chairman of the Federal Reserve. "That said, as employment expands and labor markets normalize, we should see the offshoring trend reassert itself."
Blinder identifies accountants and providers of similar financial services as prime targets. Accounting blogs set up to lure these jobs to India boast of a $47,000 saving per U.S. accountant whose job is sent offshore.
Historical trends also reveal the mounting loss of middle-skill jobs.
According to data in the MIT study by Autor, skilled professional employment rose by 28 percent from 1979 to 1989, while employment in office and administrative jobs jumped 11 percent.
Then, from 1999 and 2007, those employment gains slowed to 11 percent and 1 percent respectively. And from 2007 to 2009, spanning most of the Great Recession, there was no job growth for professionals, while office and administrative employment fell by 8 percent.
This loss of middle-skill jobs — what Autor calls polarization of the job market — intersects with another discouraging trend, the concentration of wealth at the highest rungs of the wealth ladder.
Read more: http://www.mcclatchydc.com/2010/11/1...#ixzz15H4PgX4x
Heh, nice video especially at about 1 minute.
http://blogs.wsj.com/economics/2010/...-ben-bernanke/
NOVEMBER 15, 2010, 12:01 AM ET
Open Letter to Ben Bernanke
By WSJ Staff
The following is the text of an open letter to Federal Reserve Chairman Ben Bernanke signed by several economists, along with investors and political strategists, most of them close to Republicans:
We believe the Federal Reserve’s large-scale asset purchase plan (so-called “quantitative easing”) should be reconsidered and discontinued. We do not believe such a plan is necessary or advisable under current circumstances. The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed’s objective of promoting employment.
We subscribe to your statement in the Washington Post on November 4 that “the Federal Reserve cannot solve all the economy’s problems on its own.” In this case, we think improvements in tax, spending and regulatory policies must take precedence in a national growth program, not further monetary stimulus.
We disagree with the view that inflation needs to be pushed higher, and worry that another round of asset purchases, with interest rates still near zero over a year into the recovery, will distort financial markets and greatly complicate future Fed efforts to normalize monetary policy.
The Fed’s purchase program has also met broad opposition from other central banks and we share their concerns that quantitative easing by the Fed is neither warranted nor helpful in addressing either U.S. or global economic problems.
Cliff Asness
AQR Capital
Michael J. Boskin
Stanford University
Former Chairman, President’s Council of Economic Advisors (George H.W. Bush Administration)
Richard X. Bove
Rochdale Securities
Charles W. Calomiris
Columbia University Graduate School of Business
Jim Chanos
Kynikos Associates
John F. Cogan
Stanford University
Former Associate Director, U.S. Office of Management and Budget (Reagan Administration)
Niall Ferguson
Harvard University
Author, The Ascent of Money: A Financial History of the World
Nicole Gelinas
Manhattan Institute & e21
Author, After the Fall: Saving Capitalism from Wall Street—and Washington
James Grant
Grant’s Interest Rate Observer
Kevin A. Hassett
American Enterprise Institute
Former Senior Economist, Board of Governors of the Federal Reserve
Roger Hertog
The Hertog Foundation
Gregory Hess
Claremont McKenna College
Douglas Holtz-Eakin
Former Director, Congressional Budget Office
Seth Klarman
Baupost Group
William Kristol
Editor, The Weekly Standard
David Malpass
GroPac
Former Deputy Assistant Treasury Secretary (Reagan Administration)
Ronald I. McKinnon
Stanford University
Dan Senor
Council on Foreign Relations
Co-Author, Start-Up Nation: The Story of Israel’s Economic Miracle
Amity Shales
Council on Foreign Relations
Author, The Forgotten Man: A New History of the Great Depression
Paul E. Singer
Elliott Associates
John B. Taylor
Stanford University
Former Undersecretary of Treasury for International Affairs (George W. Bush Administration)
Peter J. Wallison
American Enterprise Institute
Former Treasury and White House Counsel (Reagan Administration)
Geoffrey Wood
Cass Business School at City University London
A spokeswoman for the Fed responded:
“As the Chairman has said, the Federal Reserve has Congressionally-mandated objectives to help promote both increased employment and price stability. In light of persistently weak job creation and declining inflation, the Federal Open Market Committee’s recent actions reflect those mandates. The Federal Reserve will regularly review its program in light of incoming information and is prepared to make adjustments as necessary. The Federal Reserve is committed to both parts of its dual mandate and will take all measures to keep inflation low and stable as well as promote growth in employment. In particular, the Fed has made all necessary preparations and is confident that it has the tools to unwind these policies at the appropriate time. The Chairman has also noted that the Federal Reserve does not believe it can solve the economy’s problems on its own. That will take time and the combined efforts of many parties, including the central bank, Congress, the administration, regulators, and the private sector.”
If even 1/2 of the video represents reality....WHAT THE FUCK is Bernake still doing in his position???
Brevior saltare cum deformibus viris est vita
Rich people rule (party affiliation be damned) so of course they will choose the person easiest to bend to their will.
Faith is Hope (see Loki's sig for details)
If hindsight is 20-20, why is it so often ignored?
Don't you mean "The Ben Bernank"?
Hope is the denial of reality
&#$$@!
Brevior saltare cum deformibus viris est vita
Has the Fed Been a Failure?
http://www.realclearmarkets.com/blog...r-2%5B1%5D.pdfAs the one-hundredth anniversary of the 1913 Federal Reserve Act approaches, we assess whether the nation‘s experiment with the Federal Reserve has been a success or a failure. Drawing on a wide range of recent empirical research, we find the following: (1) The Fed‘s full history (1914 to present) has been characterized by more rather than fewer symptoms of monetary and macroeconomic instability than the decades leading to the Fed‘s establishment. (2) While the Fed‘s performance has undoubtedly improved since World War II, even its postwar performance has not clearly surpassed that of its undoubtedly flawed predecessor, the National Banking system, before World War I. (3) Some proposed alternative arrangements might plausibly do better than the Fed as presently constituted. We conclude that the need for a systematic exploration of alternatives to the established monetary system is as pressing today as it was a century ago.
BTW, finally got around to seeing the video, and it's simply awful in perpetuating some of the worse economic myths.
Look, the Fed could have done unsanitized foreign currency purchases if they really wanted to print money (and help exporters at the same time). They didn't.
Worried about inflation? Don't be:
http://www.marketwatch.com/story/us-...k=MW_news_stmp
Core CPI is essentially zero, and even when you throw in the full CPI, it's well below trend. One year CPI is at 0.6%, the lowest reading since they started taking data 53 years ago.
How about stagflation?
http://www.minyanville.com/businessm...1169?page=full
Why are we worried about high inflation? You can't get stagflation without the 'flation' part.
We also don't get an accurate picture of the health of our country by looking at just CPI. Let's recap:
Wages have been flat for at least a decade. Unemployment is high, 9.5%-17% depending on metric. 14 million out of work, at least 2 million for almost two years. 40 million on food stamps. 80 million aging boomers preparing to tap SS and Medicare. More folks needing Medicaid or SCHIPs now than ever before. Private insurance premiums rising 10-30% annually. 49 million now uninsured, up from 39 million two years ago. Something like 48/50 states are broke with unfunded pensions and billion dollar budget shortfalls. Costs of college are up and rising. Youth unemployment highest in decades. Bond vigilantes on the prowl, commodities rising, grocery prices rising, heating and electric prices rising....
All it took a couple of years ago for the consumer to freak out, was gas prices rising above $3/gallon. I know you like to be bullish on America, but the big picture isn't so rosy.....stagnant growth and stagnant wages only need a tiny bit of inflation of basic things to become Stagflation.
We aren't worried about high inflation. We are worried about Squanderville.
I'm about to deliver a warning regarding the U.S. trade deficit and also suggest a remedy for the problem. But first I need to mention two reasons you might want to be skeptical about what I say. To begin, my forecasting record with respect to macroeconomics is far from inspiring. For example, over the past two decades I was excessively fearful of inflation. More to the point at hand, I started way back in 1987 to publicly worry about our mounting trade deficits -- and, as you know, we've not only survived but also thrived. So on the trade front, score at least one "wolf" for me. Nevertheless, I am crying wolf again and this time backing it with Berkshire Hathaway's money. Through the spring of 2002, I had lived nearly 72 years without purchasing a foreign currency. Since then Berkshire has made significant investments in -- and today holds -- several currencies. I won't give you particulars; in fact, it is largely irrelevant which currencies they are. What does matter is the underlying point: To hold other currencies is to believe that the dollar will decline.
Both as an American and as an investor, I actually hope these commitments prove to be a mistake. Any profits Berkshire might make from currency trading would pale against the losses the company and our shareholders, in other aspects of their lives, would incur from a plunging dollar.
But as head of Berkshire Hathaway, I am in charge of investing its money in ways that make sense. And my reason for finally putting my money where my mouth has been so long is that our trade deficit has greatly worsened, to the point that our country's "net worth," so to speak, is now being transferred abroad at an alarming rate.
A perpetuation of this transfer will lead to major trouble. To understand why, take a wildly fanciful trip with me to two isolated, side-by-side islands of equal size, Squanderville and Thriftville. Land is the only capital asset on these islands, and their communities are primitive, needing only food and producing only food. Working eight hours a day, in fact, each inhabitant can produce enough food to sustain himself or herself. And for a long time that's how things go along. On each island everybody works the prescribed eight hours a day, which means that each society is self-sufficient.
Eventually, though, the industrious citizens of Thriftville decide to do some serious saving and investing, and they start to work 16 hours a day. In this mode they continue to live off the food they produce in eight hours of work but begin exporting an equal amount to their one and only trading outlet, Squanderville.
The citizens of Squanderville are ecstatic about this turn of events, since they can now live their lives free from toil but eat as well as ever. Oh, yes, there's a quid pro quo -- but to the Squanders, it seems harmless: All that the Thrifts want in exchange for their food is Squanderbonds (which are denominated, naturally, in Squanderbucks).
Over time Thriftville accumulates an enormous amount of these bonds, which at their core represent claim checks on the future output of Squanderville. A few pundits in Squanderville smell trouble coming. They foresee that for the Squanders both to eat and to pay off -- or simply service -- the debt they're piling up will eventually require them to work more than eight hours a day. But the residents of Squanderville are in no mood to listen to such doomsaying.
Meanwhile, the citizens of Thriftville begin to get nervous. Just how good, they ask, are the IOUs of a shiftless island? So the Thrifts change strategy: Though they continue to hold some bonds, they sell most of them to Squanderville residents for Squanderbucks and use the proceeds to buy Squanderville land. And eventually the Thrifts own all of Squanderville.
At that point, the Squanders are forced to deal with an ugly equation: They must now not only return to working eight hours a day in order to eat -- they have nothing left to trade -- but must also work additional hours to service their debt and pay Thriftville rent on the land so imprudently sold. In effect, Squanderville has been colonized by purchase rather than conquest.
It can be argued, of course, that the present value of the future production that Squanderville must forever ship to Thriftville only equates to the production Thriftville initially gave up and that therefore both have received a fair deal. But since one generation of Squanders gets the free ride and future generations pay in perpetuity for it, there are -- in economist talk -- some pretty dramatic "intergenerational inequities."
Let's think of it in terms of a family: Imagine that I, Warren Buffett, can get the suppliers of all that I consume in my lifetime to take Buffett family IOUs that are payable, in goods and services and with interest added, by my descendants. This scenario may be viewed as effecting an even trade between the Buffett family unit and its creditors. But the generations of Buffetts following me are not likely to applaud the deal (and, heaven forbid, may even attempt to welsh on it).
Think again about those islands: Sooner or later the Squanderville government, facing ever greater payments to service debt, would decide to embrace highly inflationary policies -- that is, issue more Squanderbucks to dilute the value of each. After all, the government would reason, those irritating Squanderbonds are simply claims on specific numbers of Squanderbucks, not on bucks of specific value. In short, making Squanderbucks less valuable would ease the island's fiscal pain.
That prospect is why I, were I a resident of Thriftville, would opt for direct ownership of Squanderville land rather than bonds of the island's government. Most governments find it much harder morally to seize foreign-owned property than they do to dilute the purchasing power of claim checks foreigners hold. Theft by stealth is preferred to theft by force.
So what does all this island hopping have to do with the U.S.? Simply put, after World War II and up until the early 1970s we operated in the industrious Thriftville style, regularly selling more abroad than we purchased. We concurrently invested our surplus abroad, with the result that our net investment -- that is, our holdings of foreign assets less foreign holdings of U.S. assets -- increased (under methodology, since revised, that the government was then using) from $37 billion in 1950 to $68 billion in 1970. In those days, to sum up, our country's "net worth," viewed in totality, consisted of all the wealth within our borders plus a modest portion of the wealth in the rest of the world.
Additionally, because the U.S. was in a net ownership position with respect to the rest of the world, we realized net investment income that, piled on top of our trade surplus, became a second source of investable funds. Our fiscal situation was thus similar to that of an individual who was both saving some of his salary and reinvesting the dividends from his existing nest egg.
In the late 1970s the trade situation reversed, producing deficits that initially ran about 1 percent of GDP. That was hardly serious, particularly because net investment income remained positive. Indeed, with the power of compound interest working for us, our net ownership balance hit its high in 1980 at $360 billion.
Since then, however, it's been all downhill, with the pace of decline rapidly accelerating in the past five years. Our annual trade deficit now exceeds 4 percent of GDP. Equally ominous, the rest of the world owns a staggering $2.5 trillion more of the U.S. than we own of other countries. Some of this $2.5 trillion is invested in claim checks -- U.S. bonds, both governmental and private -- and some in such assets as property and equity securities.
In effect, our country has been behaving like an extraordinarily rich family that possesses an immense farm. In order to consume 4 percent more than we produce -- that's the trade deficit -- we have, day by day, been both selling pieces of the farm and increasing the mortgage on what we still own.
To put the $2.5 trillion of net foreign ownership in perspective, contrast it with the $12 trillion value of publicly owned U.S. stocks or the equal amount of U.S. residential real estate or what I would estimate as a grand total of $50 trillion in national wealth. Those comparisons show that what's already been transferred abroad is meaningful -- in the area, for example, of 5 percent of our national wealth.
More important, however, is that foreign ownership of our assets will grow at about $500 billion per year at the present trade-deficit level, which means that the deficit will be adding about one percentage point annually to foreigners' net ownership of our national wealth. As that ownership grows, so will the annual net investment income flowing out of this country. That will leave us paying ever-increasing dividends and interest to the world rather than being a net receiver of them, as in the past. We have entered the world of negative compounding -- goodbye pleasure, hello pain.
We were taught in Economics 101 that countries could not for long sustain large, ever-growing trade deficits. At a point, so it was claimed, the spree of the consumption-happy nation would be braked by currency-rate adjustments and by the unwillingness of creditor countries to accept an endless flow of IOUs from the big spenders. And that's the way it has indeed worked for the rest of the world, as we can see by the abrupt shutoffs of credit that many profligate nations have suffered in recent decades.
The U.S., however, enjoys special status. In effect, we can behave today as we wish because our past financial behavior was so exemplary -- and because we are so rich. Neither our capacity nor our intention to pay is questioned, and we continue to have a mountain of desirable assets to trade for consumables. In other words, our national credit card allows us to charge truly breathtaking amounts. But that card's credit line is not limitless.
The time to halt this trading of assets for consumables is now, and I have a plan to suggest for getting it done. My remedy may sound gimmicky, and in truth it is a tariff called by another name. But this is a tariff that retains most free-market virtues, neither protecting specific industries nor punishing specific countries nor encouraging trade wars. This plan would increase our exports and might well lead to increased overall world trade. And it would balance our books without there being a significant decline in the value of the dollar, which I believe is otherwise almost certain to occur.
We would achieve this balance by issuing what I will call Import Certificates (ICs) to all U.S. exporters in an amount equal to the dollar value of their exports. Each exporter would, in turn, sell the ICs to parties -- either exporters abroad or importers here -- wanting to get goods into the U.S. To import $1 million of goods, for example, an importer would need ICs that were the byproduct of $1 million of exports. The inevitable result: trade balance.
Because our exports total about $80 billion a month, ICs would be issued in huge, equivalent quantities -- that is, 80 billion certificates a month -- and would surely trade in an exceptionally liquid market. Competition would then determine who among those parties wanting to sell to us would buy the certificates and how much they would pay. (I visualize that the certificates would be issued with a short life, possibly of six months, so that speculators would be discouraged from accumulating them.)
For illustrative purposes, let's postulate that each IC would sell for 10 cents -- that is, 10 cents per dollar of exports behind them. Other things being equal, this amount would mean a U.S. producer could realize 10 percent more by selling his goods in the export market than by selling them domestically, with the extra 10 percent coming from his sales of ICs.
In my opinion, many exporters would view this as a reduction in cost, one that would let them cut the prices of their products in international markets. Commodity-type products would particularly encourage this kind of behavior. If aluminum, for example, was selling for 66 cents per pound domestically and ICs were worth 10 percent, domestic aluminum producers could sell for about 60 cents per pound (plus transportation costs) in foreign markets and still earn normal margins. In this scenario, the output of the U.S. would become significantly more competitive and exports would expand. Along the way, the number of jobs would grow.
Foreigners selling to us, of course, would face tougher economics. But that's a problem they're up against no matter what trade "solution" is adopted -- and make no mistake, a solution must come. (As Herb Stein said, "If something cannot go on forever, it will stop.") In one way the IC approach would give countries selling to us great flexibility, since the plan does not penalize any specific industry or product. In the end, the free market would determine what would be sold in the U.S. and who would sell it. The ICs would determine only the aggregate dollar volume of what was sold.
To see what would happen to imports, let's look at a car now entering the U.S. at a cost to the importer of $20,000. Under the new plan and the assumption that ICs sell for 10 percent, the importer's cost would rise to $22,000. If demand for the car was exceptionally strong, the importer might manage to pass all of this on to the American consumer. In the usual case, however, competitive forces would take hold, requiring the foreign manufacturer to absorb some, if not all, of the $2,000 IC cost.
There is no free lunch in the IC plan: It would have certain serious negative consequences for U.S. citizens. Prices of most imported products would increase, and so would the prices of certain competitive products manufactured domestically. The cost of the ICs, either in whole or in part, would therefore typically act as a tax on consumers.
That is a serious drawback. But there would be drawbacks also to the dollar continuing to lose value or to our increasing tariffs on specific products or instituting quotas on them -- courses of action that in my opinion offer a smaller chance of success. Above all, the pain of higher prices on goods imported today dims beside the pain we will eventually suffer if we drift along and trade away ever larger portions of our country's net worth.
I believe that ICs would produce, rather promptly, a U.S. trade equilibrium well above present export levels but below present import levels. The certificates would moderately aid all our industries in world competition, even as the free market determined which of them ultimately met the test of "comparative advantage."
This plan would not be copied by nations that are net exporters, because their ICs would be valueless. Would major exporting countries retaliate in other ways? Would this start another Smoot-Hawley tariff war? Hardly. At the time of Smoot-Hawley we ran an unreasonable trade surplus that we wished to maintain. We now run a damaging deficit that the whole world knows we must correct.
For decades the world has struggled with a shifting maze of punitive tariffs, export subsidies, quotas, dollar-locked currencies, and the like. Many of these import-inhibiting and export-encouraging devices have long been employed by major exporting countries trying to amass ever larger surpluses -- yet significant trade wars have not erupted. Surely one will not be precipitated by a proposal that simply aims at balancing the books of the world's largest trade debtor. Major exporting countries have behaved quite rationally in the past and they will continue to do so -- though, as always, it may be in their interest to attempt to convince us that they will behave otherwise.
The likely outcome of an IC plan is that the exporting nations -- after some initial posturing -- will turn their ingenuity to encouraging imports from us. Take the position of China, which today sells us about $140 billion of goods and services annually while purchasing only $25 billion. Were ICs to exist, one course for China would be simply to fill the gap by buying 115 billion certificates annually. But it could alternatively reduce its need for ICs by cutting its exports to the U.S. or by increasing its purchases from us. This last choice would probably be the most palatable for China, and we should wish it to be so.
If our exports were to increase and the supply of ICs were therefore to be enlarged, their market price would be driven down. Indeed, if our exports expanded sufficiently, ICs would be rendered valueless and the entire plan made moot. Presented with the power to make this happen, important exporting countries might quickly eliminate the mechanisms they now use to inhibit exports from us.
Were we to install an IC plan, we might opt for some transition years in which we deliberately ran a relatively small deficit, a step that would enable the world to adjust as we gradually got where we need to be. Carrying this plan out, our government could either auction "bonus" ICs every month or simply give them, say, to less-developed countries needing to increase their exports. The latter course would deliver a form of foreign aid likely to be particularly effective and appreciated.
I will close by reminding you again that I cried wolf once before. In general, the batting average of doomsayers in the U.S. is terrible. Our country has consistently made fools of those who were skeptical about either our economic potential or our resiliency. Many pessimistic seers simply underestimated the dynamism that has allowed us to overcome problems that once seemed ominous. We still have a truly remarkable country and economy.
But I believe that in the trade deficit we also have a problem that is going to test all of our abilities to find a solution. A gently declining dollar will not provide the answer. True, it would reduce our trade deficit to a degree, but not by enough to halt the outflow of our country's net worth and the resulting growth in our investment-income deficit.
Perhaps there are other solutions that make more sense than mine. However, wishful thinking -- and its usual companion, thumb sucking -- is not among them. From what I now see, action to halt the rapid outflow of our national wealth is called for, and ICs seem the least painful and most certain way to get the job done. Just keep remembering that this is not a small problem: For example, at the rate at which the rest of the world is now making net investments in the U.S., it could annually buy and sock away nearly 4 percent of our publicly traded stocks. In evaluating business options at Berkshire, my partner, Charles Munger, suggests that we pay close attention to his jocular wish: "All I want to know is where I'm going to die, so I'll never go there." Framers of our trade policy should heed this caution -- and steer clear of Squanderville.
Faith is Hope (see Loki's sig for details)
If hindsight is 20-20, why is it so often ignored?
^
Bump for you nimrods that refused to read it.
Faith is Hope (see Loki's sig for details)
If hindsight is 20-20, why is it so often ignored?
A) It would lead to massive inflation in the short to medium term, as the prices of import substitutes will be far higher than the prices of imports.
B) Other countries would retaliate, most likely by putting additional tariffs on American exports. It would also undermine the international trading system, including by us flagrantly violating our obligations to the WTO.
C) This would distort the market. An artificially high amount of money would go toward import-substitution industries, thereby weakening the competitiveness of our export industries. This would lead to less exports, which would in turn lead to further distortion. Etc.
D) It would cause massive structural and frictional unemployment. The former due to point C, and the latter due to B.
E) It ignores the fact that our main import is oil. Oil can't be produced in the US in much greater amounts than we're producing right now.
I'm not quite sure how this is better than the alternative.
Hope is the denial of reality
Have you really considered the alternative?
Meanwhile, the citizens of Thriftville begin to get nervous. Just how good, they ask, are the IOUs of a shiftless island? So the Thrifts change strategy: Though they continue to hold some bonds, they sell most of them to Squanderville residents for Squanderbucks and use the proceeds to buy Squanderville land. And eventually the Thrifts own all of Squanderville.
Faith is Hope (see Loki's sig for details)
If hindsight is 20-20, why is it so often ignored?
I'm not really certain your arguments are all that strong. What's wrong with the idea is that it's extremely bureaucratic and that it runs the risk of choking off imports the US may not want to do without (how to buy oil if you can't find the exports to offset your buy?)
Also, what are foreign bondholders going to do with US bonds in such a closed system?
Congratulations America
I'll take potential collapse a century from now over certain collapse today. Realistically speaking, the best way for us to get rid of the trade deficit is to have China, India, Brazil, and Vietnam (and others) develop rapidly, allowing them to purchase American products. Meanwhile, we should get rid of virtually all trade restrictions and subsidies to make American companies the most competitive in the world when that moment comes.
Hope is the denial of reality
Of course you will. You won't be here then. Shortsightedness is the bane of Capitalism. And please remember, this is a warning from a premier Capitalist.
Faith is Hope (see Loki's sig for details)
If hindsight is 20-20, why is it so often ignored?
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